Shanghai Disneyland
February 24, 2003
BA 456
Tera Ferguson
Jose Luis Guerrero
Kristy Harris
Wenny Tung
Scott Yancey
Agenda






Case Introduction
Background
Project Description
Our Analysis
Recommendation
Questions?
The Walt Disney Company

Entertainment Conglomerate consisting of
Media, Studio Entertainment, Consumer
Products and Theme Parks & Resorts

Theme Park & Resorts Division



Current Park Locations: Anaheim, Orlando, Tokyo,
Paris, Hong Kong (2005)
Also includes: The Disney Cruise Line, Disney
Regional Entertainment, The Disney Vacation Club,
The Anaheim Angels, and the Mighty Ducks of
Anaheim
Revenues of $7 Billion in 2001, or 28% of companywide revenue
Disney’s Interest in China

Long-term


Current


Consistently searching for areas of expansion
where there are un-captured markets
Government relations established through the Hong
Kong Disneyland project indicate easier entry into
the mainland
Competitive

Universal-Vivendi’s land purchase in Shanghai and
proposed expansion into Beijing
Agenda






Case Introduction
Background
Project Description
Our Analysis
Recommendation
Questions?
Background: Disney Parks



Disneyland, Anaheim: 1955
Walt Disney World, Orlando: 1971
Tokyo Disneyland:1983


Owned and operated by the Oriental Land Company
Deal structure indicative of financial turmoil within the
company in the early 1980s with a 0% Equity stake


Revenue from royalties and management fees
Disneyland Paris/Euro Disneyland: 1992

Disney retains 39% of Equity Interest and receives
management fees as part of reported revenue
Hong Kong Disneyland

$1.8 Billion USD Project

60% Debt



80% Government
20% Commercial
40% Equity


43% Disney
57% Government (will eventually sell down ownership stake)

6 Million Visitors in its first full operating year, and 1.4
Million additional visitors to Hong Kong

$148 Billion value added boost to the Hong Kong
economy over the next 40 years

35,800 jobs created in the next 20 years
Background: China

Largest population in the world with relatively slow projected
population growth



1.26 B (2001) - 1.5 B (2050F)
63 - 70% Rural
High growth rates in GDP and foreign direct investment (FDI)


Urban income growth of 17.2% in 2002,
Growth in FDI of 14.8% in 2002



2003F: US$58 B
2004F: US$62 B
Accession to the World Trade Organization in December 2001


Increased support for private and foreign investments
Theme parks still fall under Restricted Foreign Investment
Industries
Theme Parks in China

Most parks in China were American-themed

Few have survived mainly because of
transportation issues

Admission Prices: 56 – 100 yuan ($6 – $12)

Park Sizes: 70 – 150 acres

Universal-Vivendi December 2002 agreement to
build a park in Shanghai


Projected park opening in 2006, with more than 8 million
visitors in the first year
In discussions to build a similar park in Beijing
Background: Why Shanghai?

Shanghai leads in GDP and
FDI in China



Shanghai residents (2002)



GDP US$4,512 (2001)
9% of total FDI in China
18.4 M, including floating
population
Average household size is 2.9
Tourist population (2000)



64.7 mainland domestic
1.5 million foreign overseas
0.5 million
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Urban
Rural
China
Urban
Rural
Shanghai
Disposable Income Per Capita (US$)
Average Consumption Expenditure (US$)
* 2000 figures
Agenda
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




Case Introduction
Background
Project Description
Our Analysis
Recommendation
Questions?
Park Location is Key
Expo Site
and
Universal
Property
Significant infrastructure
development is occurring to
support the 2010 Expo
Target Market
Target Local Market
(million)
By Income Level (yuan)
30,000 – 60,000
2.44
60,000 – 90,000
1.62
> 100,000
1.14
Total Local Market (based on income)
Tourist Market
Domestic (Mainland)
Overseas - Foreign
Overseas - Domestic
Total Target Market
* Based on 2008F Population numbers
5.20
(million)
64.7
1.5
0.50
71.90
Project Structure

1.27 Billion US$ total capital investment

60% Debt



80% Government
20% Commercial
40% Equity


43% Disney
57% Government

10.6 Million Visitors in its first full operating year and
average annual growth of 1.5%

Corporate tax rate of 30%, with tax loss carry-forwards
permitted for five years
Operating Cash Flows
Costs
Revenues




Admissions (50%)
Food and beverage
(24.5%)
Merchandise (24.5%)
Main entrance (1%)







Park labor and overhead
Maintenance materials
Entertainment
(costuming, labor, etc.)
Food and beverage
COGS
Merchandise COGS
Support labor
Miscellaneous
Discussion
Agenda






Case Introduction
Background
Project Description
Our Analysis
Recommendation
Questions?
Risk Analysis - Sovereign

Currency risk is not mitigated by this project since the
majority of cash inflows and outflows are in local currency

Expropriation risk is mitigated some with the government
taking a controlling equity stake

No other commercial or multi-lateral agency partners are
involved in the project

Because the project is in the tourism industry and involves
an American cultural icon, the susceptibility to strikes or
terrorism is slightly higher than average

The project’s location in Shanghai reduces the overall risk
of natural disasters when compared to country averages
Risk Analysis – Operating
and Financial

The technology for this project will be provided by Disney
and is proven in other locations

Potentially lengthy negotiations with the Chinese
government increases start-up risks slightly

Given the project is very service oriented, there is some
risk associated with the level of control assumed by the
government, but this is difficult to quantify

There are no financial mitigating factors ― rather, this
project is closely tied to the government

Real option: A minor amount of cannibalization from the
Hong Kong property may be expected
Cost of Capital

ICCRC





4.00%
4.00%
58.9
Adjustments







U.S. Risk Free
U.S. Risk Premium
China’s Country Credit Rating
Anchored to U.S. cost of equity
16.10%
Industry beta adjustment
Expropriation
Start-up risks assoc. with Gov’t negotiations
Sensitivity to strikes, terrorism
Sensitivity to natural disasters
Real option: Cannibalization from HK Disney
Project Cost of Capital
-0.80%
-0.97%
+0.12%
+0.08%
-0.12%
+0.08%
16.09%
Cash Flow Analysis
2003
2004
2005
2006
2007
2008
2009
Admissions
Merchandise
Food & Beverage
Main Entrance
Hotel Revenues
Total Revenue
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$283,179,483
$53,532,494
$53,532,494
$500,000
$13,687,500
$404,431,972
$296,060,956
$55,967,619
$55,967,619
$515,000
$14,098,125
$422,609,319
Park Operating Expenses
Hotel Operating Expenses
Start Up Costs
Royalty Expenses
Total Opertaing Expenses
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$133,951,636
$8,896,875
$20,000,000
$20,221,599
$183,070,109
$138,405,572
$9,163,781
$0
$21,130,466
$168,699,819
EBIT
Depreciation
EBITDA
$0
$0
$0
$0
$6,350,000
($6,350,000)
$0
$20,637,500
($20,637,500)
$0
$42,862,500
($42,862,500)
$0
$57,150,000
($57,150,000)
$221,361,863
$63,500,000
$157,861,863
$253,909,500
$63,500,000
$190,409,500
Interest on Debt
Taxable Income
Adjusted Taxable Income
$0
$0
$0
$0
($6,350,000)
$0
$0
($20,637,500)
$0
$0
($42,862,500)
$0
$0
($57,150,000)
$0
$46,908,093
$110,953,769
$0
$50,028,135
$140,381,366
$124,335,135
Less: Taxes
Less: Debt Principal
Less: Capital Expenditures
Plus: Depreciation
Free Cash Flow
$0
$0
$0
$0
$0
$0
$0
$0
($50,800,000)
$6,350,000
$0
($50,800,000)
$0
$0
($114,300,000)
$20,637,500
$0
($114,300,000)
$0
$0
($177,800,000)
$42,862,500
$0
($177,800,000)
$0
$0
($114,300,000)
$57,150,000
$0
($114,300,000)
$0
($75,679,404)
($50,800,000)
$63,500,000
$0
$47,974,365
($37,300,540)
($72,559,362)
($38,520,000)
$63,500,000
$0
$55,501,463
PV FCF
$0
($43,759,152)
($84,811,864)
($113,644,212)
($62,931,341)
$22,752,817
$22,674,387
Less: NWC
NPV
IRR
$19,242,097
17%
* Cash flows analyzed through 2029 (per Disney, typical 20-25 year financial analysis time horizon)
Real Options

Option to wait until Universal Studios opens


Already losing any first mover advantage
Universal’s track record at opening resorts is not on par with
Disney’s ― lessons learned from Universal may be minimal

Build a resort hotel in conjunction with the park

Build a “Downtown Disney” entertainment center adjacent
to park

Build another gate after several years of operation (double
park size)
Agenda






Case Introduction
Background
Project Description
Our Analysis
Recommendation
Questions?
Recommendation

Begin negotiations with Chinese government


Government equity stake and debt provisions
Land and infrastructure provisions

Disney must make the argument that a
Shanghai Park would not substantially damage
Hong Kong

Escalating political tensions on the Korean
peninsula could change the risk assessment
Questions?
Ticket Price Projection
Source: http://www.time.com/time/europe/magazine/article/0,13005,901020325-218398,00.html
All Currency in USD
Ave Annual Temperature (F)
Population (2000) in Millions
2002 Attendance in Millions
% of Attendance vs. Local
Ticket Price (1 Day 1 Park Adult)
No Tax Included
Ticket Price Base MultiDay
Ticket Price Premium MultiDay
Ticket Price (Annual Pass) No
Percentage of 1D1P to Annual
Annual Income (2000)
Annual Disposable Income
DI % of Annual Income
1D1P % of Disposable Income
Annual Pass % of Disponsable
Paris
Orlando
72.4
0.185984
33
17743%
$
$
$
$
$
$
50
192
307
369
14%
42,148
25,939
61.54%
0.19%
1.42%
67
2.1
12
571%
Anaheim/Los
Angeles
73
3.7
39.7
1073%
$
$
$
$
$
$
39
106
$
248
16%
32,660 $
5,128 $
15.70%
0.76%
4.84%
$
$
47
119
166
225
21%
42,148
25,939
61.54%
0.18%
0.87%
Hong Kong Shanghai
Tokyo
60
73
60.1
13.216
7.116
28
0
0%
0%
0%
$
$
$
$
$
$
Potential 1D1P Price
Potential Annual Park Price
Potential Attendance (in Millions)
Average Attendance Per Day
46
81
143
332
14%
37,661 $
3,924 $
10.42%
1.17%
8.46%
20,832 $
13,244 $
63.58%
155.25
1,120.44
0.00
0
5,542
1,400
25.26%
16.41
118.45
7
19178
Demand Projections
Captured 2008 Market (million)
30000 - 60000
60000 - 90000
>100,000
Captured Market Based on Income Level
Market From Tourism
Local - Domestic Tourists
Overseas - Foreign Tourists
Overseas - Domestic Tourists
Total Captured 2008 Market for Disney-Shanghai
1.83
1.30
0.97
4.09
1.84
1.23
0.86
3.94
6.47
0.075
0.005
10.64
7.764
0.075
0.005
11.78
1.14
Total 2008 Market (million)
30000 - 60000
60000 - 90000
>100,000
Total Market Based on Income Level
Market From Tourism
Local - Domestic Tourists
Overseas - Foreign Tourists
Overseas - Domestic Tourists
Total 2008 Market for Disney-Shanghai
2.44
1.62
1.14
5.20
64.7
1.5
0.50
71.90
Revenue Projections
Revenue Assumptions
Year
Expected Demand (Mil)
Admissions ($ Mil)
Merchandise ($ Mil)
Food and Beverage ($ Mil)
Main Entrance ($ Mil)
Total Revenue
F&B Per Cap
Merch Per Cap
2008
0
10.64
$283.18
$53.53
$53.53
$0.50
$390.74
2009
1
10.80
$296.05
$55.97
$55.97
$0.52
$408.50
2010
2
10.96
$305.49
$58.51
$58.51
$0.53
$423.04
2011
3
11.13
$315.31
$61.17
$61.17
$0.55
$438.19
2012
4
11.29
$325.50
$63.95
$63.95
$0.56
$453.96
2013
5
11.46
$336.10
$66.85
$66.85
$0.58
$470.39
2008 USD
2003 USD
$5.03
$4.34
$5.03
$4.34
- Assume Expected Demand Grows 1.5% Annually (Based on Attendance Figures at Other Disney Parks)
Operating Costs
Operating Expenses
Park Labor (Salaried & Hourly)
Costs Associ. w/ Park Labor
Maintenance
Entertainment
F&B
Merchandise
Support Labor
Miscellaneous
Total Expenses
USD (Millions)
$50.00
$25.00
$15.00
$25.00
$10.62
$17.55
$5.00
$5.00
$153.17
Park Labor (Salaried & Hourly)
Costs Associ. w/ Park Labor
Maintenance
Entertainment
F&B
Merchandise
Support Labor
Miscellaneous
Total Expenses
2008
$23.19
$28.98
$17.39
$28.17
$11.33
$16.78
$2.32
$5.80
$133.95
Adjusted (2003 Dollars) Adjusted (2008 Dollars) % Revenue
$23.19
$20.00
$28.98
$25.00
$17.39
$15.00
$28.17
$24.30
21.16%
$11.33
$9.77
31.35%
$16.78
$14.48
$2.32
$2.00
$5.80
$5.00
$133.95
$115.55
2009
$23.88
$29.85
$17.91
$29.02
$11.84
$17.55
$2.39
$5.97
$138.41
2010
$24.60
$30.75
$18.45
$29.89
$12.38
$18.34
$2.46
$6.15
$143.01
2011
$25.34
$31.67
$19.00
$30.78
$12.94
$19.17
$2.53
$6.33
$147.76
2012
$26.10
$32.62
$19.57
$31.71
$13.53
$20.04
$2.61
$6.52
$152.70
Capital Structure
Capital Structure Assumptions
Investment Schedule
Park Investment
Hotel Investment
Total Investment
% Debt
% Equity
$1,200,000,000
$70,000,000
$1,270,000,000
60%
40%
Debt
$762,000,000
Equity
% Disney
% Government
$508,000,000
43%
57%
Disney Equity
Government Equity
$218,440,000
$289,560,000
Year
Percent
2004
0.1
2005
0.225
2006
0.35
2007
0.225
2008
0.1
Total
$127,000,000
$285,750,000
$444,500,000
$285,750,000
$127,000,000
Debt
$76,200,000
$171,450,000
$266,700,000
$171,450,000
$76,200,000
Equity
$50,800,000
$114,300,000
$177,800,000
$114,300,000
$50,800,000
On-Going Capital Expenditures
Assumptions:
-US Parks spend approximately $100 Million every 3 years for new attractions
-Assume 10% is local labor
-Labor costs are 1/3 of US
-Estimate Shanghai Disneyland will spend approximately $93 Million every 3 years (Current Dollars)
-With inflation, translates to $37.02 Million for 2009, Grow at rate of inflation
-Assume hotel will have $1.5 Million in Cap Ex every year beginning in 2009, Grow at rate of inflation
-Total Cap Ex in 2009 is $38.52 Million
Depreciation
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Cap Ex
$120,000,000
$270,000,000
$420,000,000
$270,000,000
$120,000,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
2004 Cap Ex
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$0
$0
$0
$0
2005 Cap Ex
$0
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$13,500,000
$0
$0
$0
Depreciation Expense
2007 Cap Ex
2006 Cap Ex
$0
$0
$0
$0
$0
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$21,000,000
$13,500,000
$0
$0
$0
2008 Cap Ex
$0
$0
$0
$0
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
Total
$6,000,000
$19,500,000
$40,500,000
$54,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$60,000,000
$54,000,000
$40,500,000
$19,500,000
$6,000,000